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The rand rebounded more than 3% in September after a 9.6%
slump in August, the worst for that month on record. It could extend gains as
the dollar resumes its long-term decline, according to Neels Heyneke and Mehul
Daya, strategists at Johannesburg-based Nedbank.

Much hinges, however, on Nene, who has to reassure both
Moody’s and investors that he has a handle on spending and debt.

Last year, a widening fiscal deficit and slower economic
growth projections led S&P Global Ratings and Fitch Ratings to strip the
country of its investment rating, sending yields skyrocketing and the rand
weaker. That won’t be easy, given that the economy is struggling to emerge from
a first-half recession.

“October is key,” said Christopher Shiells, a London-based
emerging-markets analyst at Informa Global Markets. “We and Moody’s want to see
a medium-term budget policy statement that focuses on fiscal consolidation, and
stabilising debt levels, given the low growth environment.”

A positive statement from Nene could push the rand to about
13.75 per dollar, from around 14.22 on Friday, he said

Moody’s rates South Africa’s local-currency debt at Baa3,
the lowest investment level. The rating company’s stable outlook on the debt
means there is little chance of a change in the assessment soon, though it said
last month South Africa has to stabilise its debt to prevent a change to
negative.

Disappointing Moody’s would prove costly. Foreign investors
own almost 40% of South Africa’s R1.97 trn of local-currency bonds. Should the
country lose its investment rating, it would be excluded from Citigroup’s World
Government Bond Index (WGBI), sparking outflows of about $5bn (about R70bn) as
investors who track the gauge are forced to sell, according to Bank of America
Merrill Lynch.

“The bar for Moody’s to act remains high but WGBI exclusion
is a long-term risk,” Gabriele Foa, a London-based analyst at BofAML, said in a
note dated September 26. “Rough math suggests that while it is not an immediate
risk, the long-term risks from potential investment grade losses remain
elevated.”

Moody’s was scheduled to review South Africa’s credit rating
on October 12, but said last month it may delay until after the budget
statement on October 24. For now, traders aren’t overly concerned, if options
pricing is anything to go by.

The premium of options to sell the currency over those to
buy it in the next month, known as the 25 Delta risk reversal, dropped 38 basis
points on Friday to 3 percentage points, the lowest in almost two months.